GB: CIPS/PMI Services Index

Thu Nov 03 04:30:00 CDT 2016

Consensus Actual Previous
Level 52.5 54.5 52.6

Services had a decent and better than expected October according to the latest sector PMI survey. At 54.6, the headline gauge was comfortably above market expectations, up nearly 2 full points from its unrevised September reading and indicative of the fastest growth in business activity since the start of the year.

Incoming new business saw its sharpest increase in nine months, in part reflecting improved competitiveness courtesy of sterling weakness. Probably as a result, business optimism continued to rise from July's post-Brexit vote slump and recorded its best level since May. Reflecting this, sector headcount expanded for a third consecutive month, albeit at a rate well below that seen over much of 2014 and 2015.

Meantime, the slide in the exchange rate helped to boost input cost inflation to its highest mark since March 2011 as charges registered a record monthly acceleration. As a result, service providers lifted their output prices by the greatest amount since April 2011.

Taken together with the surprising strength of both the manufacturing (54.3) and construction (52.6) surveys, today's PMI results yield a composite output index of 54.6. This constitutes a near-1 point rise versus September and should be consistent with quarterly real GDP growth of 0.4-0.5 percent. With inflation pressures clearly building, what limited room there was previously for another BoE ease today would seem to have disappeared.

The Services Purchasing Managers' Index (PMI) provides an estimate of service sector business activity for the preceding month by using information obtained from a representative sector survey incorporating transport and communication, financial intermediation, business services, personal services, computing and IT and hotels and restaurants. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The data are compiled by the Chartered Institute of Purchasing and Supply (CIPS) and Markit.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM non-manufacturing index in the U.S. and the Markit Services PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The Markit PMI services data give a detailed look at the services sector, how busy it is and where things are headed. The indexes are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.